For Shrinking Greylock Hedge Fund, $100,000-a-Month Rent Proved Too Much

(Bloomberg) -- Argentina, Mozambique, Barbados and the Republic of Congo have two things in common: They’ve all restructured their debt, and they’ve all tangled with Greylock Capital Management.

Now Greylock, one of the best-known hedge funds in emerging markets investing, finds itself at a similar crossroads. Some 25 years after its founding, the firm -- its assets headed to a mere $350 million or so by the end of March -- on Sunday filed for bankruptcy protection in New York. The firm is seeking to end its lease in midtown Manhattan after investors pulled their money following three years of losses, most recently stemming from the pandemic.

It’s a humbling turnaround for the hedge fund, which made a name for itself for its deep expertise and as one of the more outspoken firms in the emerging-market space, punching well above its weight. While the firm has no plans to shut down, it’s operating at a fraction of its former self: a staff of nine, down from 21 in 2017, and assets at about 30% of their $1.1 billion peak. Paying $100,000 in monthly rent for now-unused Manhattan offices was becoming untenable.

“We’re right-sizing our cost structure so we know we’re stable,” Greylock President Ajata “AJ” Mediratta said by phone.

Putting Green

Before the pandemic left its employees confined to the suburbs, Greylock was known for putting on a good show at its Madison Avenue offices in Manhattan. The partners often hosted outdoor meetings with dignitaries on a putting green they’d installed on the terrace of the midtown office. Flagsticks on the green displayed banners for Argentina, Greece, Mozambique and other nations whose debt the firm had a hand in restructuring.

Inside, the offices boasted a foosball table where the firm would host an annual tournament for employees. In its heyday, Greylock’s summer boat party was a who’s-who of emerging-market bankers and traders.

“We’re known as the friendly restructuring guys,” said Mediratta. “We still want our money, but we’re not jerks about it.”

Former Lehman Bros Inc. executive Hans Humes, 56, founded Greylock in 1995 as a joint venture with Van Eck Associates, and began trading the strategy in 1997. The firm spun out as a hedge fund around 2004. Humes, an avid outdoorsman, named the firm after the tallest peak in Massachusetts, where he frequently used to ski.

Mediratta, Humes’s friend from Williams College, joined in 2008 from Bear Stearns Cos., where he oversaw international debt capital markets. Altogether, Greylock’s partners have participated in over 50 creditor committees in more than 30 countries, dating back to the 1980s and early 1990s, including restructuring the debt of several countries into Brady Bonds.

Trip to Iran

Its more notable deals include Greece, where Greylock was the only U.S. creditor on the steering committee to negotiate the nation’s debt restructuring. The hedge fund also co-chaired a steering committee before Argentina’s notorious 2005 debt restructuring, and was among bondholders that rejected that 30-cent offer. The firm’s partners have been involved with no less than five workouts in Argentina.

Always in search of a potential investment opportunity, Humes hopped on a plane with his then 20-year-old son to Tehran in 2015 to learn more about Iran while it was negotiating with the U.S. to end sanctions.

“Hans has been involved in every major sovereign debt restructuring for the past twenty years. He is talented and knowledgeable,” Jay Newman, a former portfolio manager at Elliott Management who oversaw the hedge fund’s lengthy battle with Argentina, said in an email.

Greylock often plays an outsized role in debt talks relative to its size, many times volunteering to lead negotiations even if its investment is small, according to a sovereign restructuring adviser who’s sat across the table from Greylock and asked not to be identified because the talks were private. While the firm presents itself as being constructive, it’s often been met with skepticism by government officials, the person said.

Poor Performance

The firm was digging itself out of 3% losses in 2019 from private credit trades gone awry and tighter oil sanctions that pummeled Venezuelan debt when the Covid-19 pandemic hit. The flagship fund plunged about 14% last year as the virus slammed risk assets. Losses were led by Argentina and Venezuela, while the firm continued to write off some private credit trades, according to Mediratta.

Investor withdrawals were mostly spurred by the poor performance. The firm was stung by one particularly large withdrawal by an institution concerned with socially responsible investing that didn’t like the optics of being invested in countries such as Mozambique.

In the absence of new money, assets will drop to about $350 million at the end of March. Despite the recent losses, Greylock’s flagship fund has had annualized returns of 11% since its inception, beating the average hedge fund and JPMorgan Chase & Co.’s benchmark emerging-market debt index over the same span.

Suburban Office

The firm is in talks with its remaining major investors, confident that the business can “successfully reorganize and continue as a going concern” after the bankruptcy, according to a Jan. 31 court filing signed by Chief Financial Officer David Steltzer.

The hedge fund opened a small office in Stamford, Connecticut last year to make it easier for the firm’s commuters, reducing the need for a large office in midtown Manhattan.

“I’m not sure a physical office is that worthwhile in the new business environment,” said Humes, who avoided working from the office even before the pandemic.

Looking to the future, Mediratta and Humes said the pandemic has created a wealth of opportunities in the hedge fund’s wheelhouse, particularly in Africa. “We’d rather focus on that than an office with nobody in it,” Mediratta said.

Greylock filed for Chapter 11 protection under the Subchapter V provision, which was introduced last year to make the bankruptcy process cheaper and easier for small companies.

The case is Greylock Capital Associates LLC, 21-22063, U.S. Bankruptcy Court, Southern District of New York.

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